For business people reading this post we congratulate you. It actually is important to know the essentials of asset based lending. Asset Based Lending is a type of revolving commercial financing that permits a business to borrower against a discounted value of their assets. Asset based lenders concentrate on the worth of the collateral during the underwriting process a lot more than the credit history of your organization.
Asset based loans typically have several different collateral pools and advance rates as part of the structure.
Below are the basics of an asset based loan:
Because Asset based lending is applied for businesses with revenue from $1,000,000 to well over a Billion, pricing differs greatly. Large, strong borrowers can borrow at close to commercial paper rates but most asset based loans are created to companies with revenue less than $100,000,000. The “all in rate” for these loans is typically between LIBOR + 8% and LIBOR Plus 20%. Rate depends on the size of the loan and the financial strength of the borrower.
Accounts Receivable – Average advance rates between 80% and 90%. Most asset based loans have got the majority of the loans towards the accounts receivable.
Inventory – Traditional advance rates between 35% and 65%. Advance rates depend on the salability of the inventory in a liquidation. The more specialized the inventory, the low the advance rate
Machinery and Equipment – Advance rates for asset based loans are typically 60% of the orderly liquidation value. A large amount of lenders will require the Machinery and Equipment to be reappraised every year.
Real Estate – Advance rates are ordinarily 50% of the appraised value.
Asset based loans characteristically demand the borrower to revalue the assets whenever they take an advance. This is often made by submitting what’s called a “borrowing base” to the asset based lender which is quite simply a spreadsheet that gives the current value of the assets. Since the value of accounts receivable and inventory change often, the borrowing base calculations focus on these assets.
For the most part asset based lenders require a personal guaranty from the majority owners of the business.
Typical asset based loans require that all customers of the borrower remit payment for invoices to a lockbox controlled by the lender.
All asset based loans have loan covenants. These may very well be very restricted financial covenants depending on the cash flow and balance sheet of the organization.
Underwriting an asset based loan can take between 30 and 60 days. The lender will quite often send a field examiner into the business to examin the books and records. Be expecting to have most of your assets appraised. The cost of the due diligence will be the responsibility of the borrower. Which include legal costs it is not unusual for the total expenses to exceed $100,000 and could be as much as $1,000,000.
At NeeBo Capital we focus on lending against accounts receivable to companies with revenue less than $10,000,000. We don’t charge our clients for due diligence and because we only lend against accounts receivable the entire process is generally done in under a week.
Our system is completely electronic so we are able to keep overhead down and pass that cost savings along to our clients by eliminating line fees, wire fees and monthly maintenance fees. With NeeBo Capital you only pay for what you use.
For more information about our electronic, online financing program please click the button below.